The 5 Pitfalls of CEO Succession
By Ram Charan, Jerry Useem (  11-03-2002)

It takes effort to find CEOs like those described on the previous pages. For a board of directors, no decision is more momentous. Yet many boards--perhaps even most--do a dismal job of succession planning. According to one survey, a stunning 45% have no process for grooming potential CEOs. None! That sets them up for five big pitfalls:

1. Letting the CEO play kingmaker
Though many CEOs relish the process of cultivating a replacement, to others it's a threatening reminder of their own mortality or, worse, dispensability. Some develop a knack for driving off any promising heir. Others back successors cast in the image of guess-who.

That's why boards shouldn't allow a choose-your-own-successor approach. Starting a minimum of six years in advance, they should demand a list of candidates, plus regular briefings on how those candidates' skills are being tested. As the top contenders emerge, the outside directors have a duty to meet with them alone for open-ended discussions. The larger goal is to create what former Fannie Mae CEO James Johnson has called a "succession culture." A periodic census of the leadership pools at all levels will help spot future stars earlier in their careers.

2. Using boilerplate criteria
When headhunters draw up their "specification sheet" describing the ideal candidate, the language tends to be hopelessly generic. Consider these passages from two actual spec sheets--one for a software firm, the other for a manufacturer--and try to guess which is which. One company seeks a "natural leader and mature communicator" with a "bias for action" and a "solid reputation for integrity, maturity, and energy." The other is looking for a "proven leader" who is "decisive, action-oriented, and personable, with the highest integrity and authenticity." Stumped? (The manufacturer is the first one, the software firm the second.)

Instead of wasting time with such boilerplate drivel, boards need to drill down to specifics. If the job opening is in the PC industry, the first question to a candidate ought to be, How are you going to cope with Michael Dell's attack on the business? If you can't cope with it, what's plan B? Remember, a board's task is to find someone with the right skills for this job, not someone who meets central casting's idea of a "leader."

3. Letting headhunters run the show
Executive recruiters can play a valuable role in assembling a slate of candidates. But boards err by letting them rush the deal to a conclusion. At one major infrastructure company, the selection committee never even interviewed a second candidate--a blunder reflected in the company's subsequent sagging performance.

It's best for boards to set aside two days to meet with finalists. The directors split into small groups, rotating candidates through at least three interviews. They shouldn't hesitate to grill them: Too often "interviews" of attractive outsiders turn into wooing sessions. Then the board reassembles for debate.

4. Succumbing to fads
Outsiders are in. Between the 1970s and the late 1990s the proportion of externally recruited CEOs rose from 8% to 19%. (This despite studies showing that outsiders are more expensive than insiders--commanding roughly twice the starting compensation--and perform no better on average.) There are cases where outside hires make sense. But relying on external labor to fill the top slot should be seen for what it usually is: a second-best approach.

For one, boards simply have less information about outsiders. Headhunters' reference checks are notoriously superficial, while candidates' self-representations can be highly selective if not downright deceptive. It seems unlikely, for instance, that Sunbeam Corp. would have hired "Chainsaw" Al Dunlap in 1996 had it known a prior employer had sued him, though unsuccessfully, for accounting fraud.

A fixation on outside saviors also undervalues in-house talent, often assumed to be bureaucratic, blinkered, and beholden to the status quo. This view ignores the fact that some of the biggest corporate revolutionaries have been insiders. Jack Welch was already a 20-year company man when he put General Electric in the blender, while insiders also led dramatic transformations at Circuit City , Intel, and Boeing.

Finally, outside hires are too often a symptom of boards' anxiety to please Wall Street and its bias for new blood. The day AT&T signed Michael Armstrong as CEO, its market value surged $3.8 billion; the day Kodak signed former Motorola chief George Fischer, its value climbed $1.4 billion. Never mind that both appointments were the result of each company's failure to line up an internal successor (and that those one-day surges proved fleeting). The last people you want weighing in on the succession process are securities analysts.

5. Keeping Elvis in the building
So the board has picked a new CEO. Now make sure the old one leaves the premises. Really. Intentionally or not, ex-CEOs can end up undermining their successors when they linger around the building or the boardroom. That's why the safest policy is a clean break. It sounds harsh. But as the outgoing CEO surely knows, nothing succeeds like a smooth succession.